Courts’ stand on schemes of arrangement

The Federal Court is attempting to address shareholder ignorance about the level of protection provided by courts over schemes of arrangement.

It has issued a new practice note stipulating that court approval of a meeting to consider a scheme does not mean the court has endorsed the scheme’s merits.

Schemes of arrangement are increasingly being used in cases where listed companies are restructured or merged. But the court’s role in approving them is largely technical – it provides very limited scrutiny on behalf of shareholders because the two court hearings that consider such schemes are typically ex-parte applications.

This means there is no party arguing against the scheme.

Former Federal Court judge Kevin Lindgren said in an interview in April that shareholders misunderstood the extent of the court’s role when it approved a scheme. He argued that better disclosure about the court’s role might encourage more minority shareholders to question oppressive schemes.

Federal Court chief justice Patrick Keane signed off on a new practice note last month that defines the parameters of the court role.

The note says when the court orders a meeting to vote on a scheme of arrangement, it should require the explanatory statement to display a notice stating that the fact a meeting has been ordered does not mean the court “has formed any view as to the merits of the proposed scheme or as to how members/creditors should vote" or that it “has prepared, or is responsible for the content of the explanatory statement".

Typically, scheme booklets include statements from the Australian Securities and Investments Commission and the Australian Securities Exchange absolving themselves from any responsibility over the contents.

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Judicial paranoia about the market’s misunderstanding of the courts’ oversight of schemes of arrangement has its roots in the ill-fated NSW Supreme Court approval of the scheme that facilitated James Hardie’s move to the Netherlands.

Federal Court judge
Peter Jacobson
raised questions in March this year about the courts’ oversight of schemes while he grappled with approval of the scheme of arrangement seeking to facilitate Seven Network’s takeover of the privately owned WesTrac.

The Federal Court also knocked back a scheme of arrangement proposed by CSR to separate its sugar and renewable energy businesses from the building products business that would hold the company’s asbestos liabilities. This decision was overturned on appeal in April.

It is understood the new practice note has been made on a harmonised basis by the Federal Court and all the supreme courts of the states and territories.

Freehills partner Tony Damian said there was not a widespread misunderstanding in the market that courts, when they approved schemes of arrangement, were endorsing the commercial merits of the deals.

“Retail shareholders are more interested in what boards and independent experts think about the commerce of a particular deal," he said.